Shifting Currency/Equity Market Relationships

The risk-on/risk-off driver seemed to characterize in many ways during the financial crisis and its immediate aftermath. One of our thematic points is that this relationship is breaking down. In this context we re-examined the correlations between the euro/dollar and dollar/yen exchange rage and the S&P 500.

Recall that in terms of methodology, we run the correlations on the percentage change of daily movement. Over the course of 2008, the euro/dollar and the S&P 500 were correlated 20.3%. Last year it rose to almost 50%. Year-o-date it is just below 44%.

Looking at a 60 day rolling correlation, the correlation made a record high in October last year a little over 68%. It now stands at about 45%. The record low was set in 2003 at -69%, but did reach almost -55% shortly after the collapse of Lehman.

While the relationship between the euro and the S&P 500 has relaxed a bit, the correlation remains at the upper end of the historic range. Over the course of the year, we look for the correlation to ease further.

The dollar/yen correlation with the S&P 500 has also eased. In 2008, the correlation was almost 67.5%. Last year the correlation was cut in half to almost 32%. Year-to-day the correlation has recovered to just above 45%.

Looking at the 60-day rolling correlation, the correlation made a record high in late '07 near 80.5%. It broke down in late 2008 and since then has spent little time above 50%. Both late September 09 and earlier this month the 50% area was flirted with both times the correlation weakened. It is now near 43%. The record low was set in mid-04 at -57.3%.

On this 60-day rolling basis, the euro/dollar and dollar/yen are similarly correlated with the US S&P 500. This quick review of correlations suggest that while the risk-on/risk-off driver has weakened, it is still to be found.